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Can my grandfather's living annuity be paid out in cash?
My 78-year-old grandfather had a retirement annuity (RA) that was converted into a living annuity two years ago, when its value was R150 000. One-third of the value was paid to him in cash. The remaining value is now R77 000. Can the living annuity be terminated and the full value paid out?
Jaco Joubert, a financial adviser at PSG Wealth in Sandton in Johannesburg, responds: On October 30, 2008, the Minister of Finance prescribed the rules for converting a living annuity to cash (known as commutation). The annuitant may commute the value of the annuity if it falls below:
• R50 000, where any of the value of the annuity or any part of the retirement interest was previously commuted for a single payment; or
• R75 000, where a lump sum has not previously been taken.
Your grandfather will not be able to have the full amount paid out in one amount, because one-third was paid to him at retirement and the current value is not below R50 000.
However, it is expected that the values may be increased to align with the revised commutation value for RAs that took effect on March 1, 2016.
Which is better: buying property or investing in a unit trust?
Is it better to buy a home or stay invested in a unit trust fund? My 25-year-old daughter has R250 000 in the Coronation Balanced Defensive Fund, in which she invests R500 a month. She has started working and soon she will want to move into her own home.
I have advised her to use the money in the unit trust as a deposit on a flat. If she found a decent two-bedroom flat, she could rent out a room to friend to pay part of the mortgage bond.
But someone else has advised that she should rent for a few years and pump whatever she can into unit trusts or another investment that could produce a higher return than property.
Although the logic might, in part, be sound, I have always thought it best to get a foot in the property market.
Pierre de Bruyn, a financial adviser at PSG Wealth in Northcliff, Johannesburg, responds: Your daughter’s savings habit will serve her well in creating a predictable financial future. This behaviour is more important than the specific asset class in which one invests, as long as you are beating inflation. Your question, however, demands that we compare property and equities, and, to this end, I have set out some points to consider.
• Equities have generated a better return than property over the longer term. The differential is about two to four percent a year, depending on a wide range of factors, the details of which I cannot go into here.
• Property prices and returns are generally far more stable than those of the equity market, and property is therefore considered a lower-risk asset class.
• Equities are highly liquid, although short-term volatility might make it less than ideal to liquidate them in a bear market. Property prices are reasonably stable, but property is an extremely illiquid asset. It can take a long time to sell a property. A property should be held for seven to 10 years, to recover the acquisition costs.
• Shares can be bought and sold for about one percent of the trading cost. Property costs include bond registration costs and transfer costs, which can be as high as 13 percent. Sellers also push up the price to take estate agent’s commission into account.
Looking at your question from a pure investment perspective, it is easy to decide in favour of equities/unit trusts.
The other perspective is the sense of security and pride that comes from owning your own home. This has a value that cannot be assessed on purely financial grounds. Employers consider homeownership a positive factor when assessing candidates for jobs, because homeowners are seen as more stable. The effect of gearing a property and increasing the actual yield can also go a long way to making the return more acceptable.
The reality is that we all hope to own our own home. If this happens to be a priority and some equity returns are reduced by allocating money to property, then so be it. I don’t believe it is a question of the one being better than the other. It is probably more important that a person does what is appropriate at that time in his or her investment life.
I suggest that both you and your daughter consult a suitably qualified financial adviser. You will be asked many more questions and will probably emerge with better advice.
How much do I need to trade shares?
I want to trade shares, but I’ve heard that one needs at least R10 000 per trade. Is this correct, and if so, why?
Francois van Wyk, a portfolio manager at PSG Wealth in Stellenbosch, Cape Town, responds: You don’t need a minimum amount to trade shares. As a rule of thumb, however, the cost of a trade below R10 000 is punitive. The cost of a single trade of R10 000 was compared on three online trading platforms. The comparison excluded the monthly administration fee for operating a trading account. The buying costs are between 1.5 and 1.8 percent (including VAT), which is similar to the annual management fee of an actively managed equity unit trust fund. The selling cost will be the same, except that security transfer tax (0.25 percent) will not be payable. Therefore, the effective total cost of a R10 000 trade (buy and sell) is 2.7 to 3.4 percent.
For a trader just to break even – let alone make a profit – the return has to equal the total trading cost. This could be a tall order, and larger trades should be considered to achieve a more acceptable cost of, say, 1.5 percent. Using the same assumptions as above, this equates to a trade of at least R25 000.
The comparison with a unit trust investment is not entirely fair, because a unit trust provides exposure to a diverse portfolio of stocks.
Research suggests that a share portfolio should consist of between 10 and 15 stocks to achieve an appropriate level of diversification (adding shares to a portfolio of 15 shares has only a marginal benefit in terms of diversification). To this end, investors who want to trade shares directly should have at least R250 000 to invest and invest in at least 10 stocks.
Should I switch to a tax-free savings account?
I am 69 and retired. I am married in community of property. My wife, who still works, has her own pension fund. I underwent a heart bypass operation in 1996. I have had other operations since then. I have R2 million in discretionary investments and R1 million in a living annuity. My income drawdown is four percent a year. Should I transfer my discretionary savings to a tax-free savings account (TFSA)?
Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: It is commendable that despite the struggles in your life you have managed to stay focused on your financial well-being. You should seek advice from a specialist fiduciary adviser to ensure that the decisions you have made are complemented by a detailed financial and estate plan. This is particularly necessary because you are married in community of property and have suffered some health setbacks.
Investing in a TFSA is always a good idea; any form of saving is to be applauded. However, you need to establish that moving your discretionary investments to a TFSA will, in fact, benefit you. To do this, you need personal advice from a qualified financial adviser.
I do not have sufficient information about your portfolio, so I am hesitant to recommend that you transfer funds from your existing plan to a TFSA. However, if we look at the benefits of a TFSA, we might gain some insight into which option could benefit you more. The tax benefits of a TFSA are that interest, dividends and capital gains are tax-free.
Although, because you are over 65, you are already entitled to an annual interest exemption of R34 500, the interest earned by your portfolio might be exceeding this amount. In this case, a TFSA could benefit you.
Dividends are taxed at a rate of 15 percent. This is not the case with investments housed in a TFSA, which means your investment will grow a little faster than in a normal unit trust portfolio.
Natural persons receive a capital gains tax (CGT) exclusion of R40 000 year. You could transfer R30 000 a year from your discretionary investments to a TFSA without paying CGT. But you must obtain expert advice about the implications for your financial plan and your tax liability.
Capital gains are not taxed in a TFSA, but this works most to your advantage if you invest for the long term, because your capital will have had an opportunity to grow significantly.
Transferring from your voluntary investment plan to a TFSA is not likely to reap extraordinary benefits over the short term. It is long-term investors on a high marginal tax rate who stand to benefit most from a TFSA.